World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Monday, November 15, 2010

Equity futures are naturally higher this Monday POMO morning, surprisingly with the dollar higher. Bonds are significantly lower in price, oil is higher, while gold is lower.

The Empire State Manufacturing Index just produced a major league miss, crashing from its prior level of 15.73 all the way down to -11.1 when the consensus was +15! My oh my, the disconnect between reality and fantasy has never been larger. That’s the first negative print in that index in well over a year. Here’s Econoday:

HighlightsEmpire State data for November are surprisingly weak showing a major month-to-month decline in new orders, at minus 24.38, together with an equally major decline for unfilled orders, at minus 24.68. Contraction in unfilled orders has been ongoing since April, keeping a lid on production needs. Shipments a very steep 25 points to minus 6.13 in the month, the workweek fell to minus 12.99 with delivery times, at minus 9.09, improving for a fifth month in a row.

The employment index continues to show strength, at plus 9.09, as do readings on the six-month outlook. But as an indication for November's manufacturing data on the national level, this report points to trouble. Watch for trouble in Thursday's Philadelphia Fed report, a report that has been trending significantly lower than Empire State.

Those are some hugely negative moves. So new orders are way down yet employment is up over the same time period? What does that tell you about margins? Yet more evidence of businesses who were led astray, and whose margins are getting crushed with QE2 rescue. Good luck.

Speaking of fantasy, the Retail Sales Report came out at positive 1.2% growth month over month, and at .4% year over year. This report is riddled with error and I can guarantee you that the real year over year figure is substantially negative. This is due to substitution bias as this report fails to account for stores that close, and also due to the falling purchasing power of the dollar as sales are measured in dollars. Still, the consensus for this drivel was .7%, here’s Econoday:

HighlightsThe consumer sector continued to strengthen in October with sales topping expectations. Overall retail sales in October jumped 1.2 percent after gaining 0.7 percent in September. The latest number sharply topped analysts' projection for a 0.7 percent increase. Excluding autos, sales posted a more moderate but still healthy 0.4 percent increase, following a 0.5 percent advance in September and coming in a little higher than the median market forecast for a 0.4 percent boost. Sales excluding autos and gasoline increased 0.4 percent, matching the increase in September.

The good news is that the consumer sector is continuing to prop up the recovery-maybe even given it a modest strengthening. October gains were mixed but notably more on the positive side. Motor vehicles & parts led the way, jumping 5.0 percent. And apparently, even though housing is sluggish, households are fixing up homes as building materials & garden equipment posted a 1.9 percent boost. Gains were also seen in food & beverage, gasoline stations, clothing, sporting goods & hobby, general merchandise, nonstore retailers, and food services & drinking places.

Furniture dipped but after several strong gains. Declines were also seen in electronics (likely price cutting), health & personal care stores, and in miscellaneous store retailers.

Equity futures eased slightly but on a much weaker than expected Empire State manufacturing number released at the same time.

Business Inventories are released at 10 Eastern. This week is fairly busy for economic reports, but nothing that’s so important that it will freeze the markets. Friday is options expiration and there are no reports that day.

I have to report on the following bizarre incident in Kansas City where police shot at a passing by van that backfired thinking they were being fired upon (ht Ron):

Phillip Ransom thought he had trouble Thursday night when his old van broke down on the side of the road, booming out backfires.

But that was when his troubles really began.

Two Kansas City police officers, mistaking the van’s backfires for gunshots, began firing at it.It was a terrifying moment for the Kansas City man, who was unarmed and said he did not own a gun.“I’m just an ordinary guy,” he said. “I go to work every day.”

Fortunately he was not hit. At least three bullets hit the van. Ransom said he did not know how many shots were fired.

“I wasn’t counting,” he said. “But it sounded like a lot.”

A department spokesman confirmed that Ransom was unarmed and said the officers have been placed on administrative leave while the incident is investigated.

The incident occurred just before 6 p.m. Thursday on Gregory Boulevard near Interstate 435. Ransom, who owns a janitorial service, said he was on his way home from work.

Besides the damage to Ransom’s van, windows of the patrol car were also shot out — apparently by the officers as they got out of the patrol car.

Police and media reports initially described the incident as the police car being hit by a bullet fired from a suspect in the van.

Why do I think this idiocy is important? I think it shows just how jumpy the population is, there is tension in the air. That tension was also very evident in the reaction to the “missile” contrail last week. Who else has an itchy trigger finger? My point here is that the spring seems to be wound tight, a triggering event could occur at any time, and the equity markets are grossly overvalued.

And the bad math of debt has certainly produced massive tension around the globe. I could cite article after article as evidence of that, but there’s so much of it, I can’t possibly discuss it all. In flying circles when talking about safety we talk about the Swiss cheese analogy. If your slices of Swiss cheese have a lot of holes, then sooner or later as you stack the layers of cheese those holes will eventually align and cause an accident. If, however, you are operating in the center of the envelope and trapping errors, then you lessen the number of holes and thus decrease the odds of the holes aligning into an accident. It would seem to me to be impossible to keep an economic and market accident at bay as the number of holes I see is staggering.

The jump in the ten year Treasury rates this morning is very large, about .15%! Rate moves like that in one day may scare people out of debt instruments. That can have very distortive effects in other asset classes as money moves around the globe, and higher interest rates will not be a positive for the Fed who is trying to force rates down, nor for the economy that is saturated in debt. Housing recovery? Don’t bet your life on it.

The Yen is finally moving back down. That correlation is generally good for the Japanese, but it has not been so good for the equity markets as it forces our dollar up. The Euro is weak, and as far as I can see, it’s simply a race to see which countries implode first as every country who comprises the dollar basket is nothing but a basket case full of debt that can never possibly be serviced. The pretend part can and will only go so long.

Turning to the markets, as I look at the longer term weekly chart of the SPX, it is apparent that we may have produced a double-top. This comes right on the 61.8% retrace of the entire market. If it is a double-top, then the coming decline is likely to be very significant. Despite the higher high in the market, check out the negative RSI divergence that has produced a lower high, that is quite rare on this timeframe:

The divergences on the longer timeframe indicate that the decline may be significant in terms of both price and time. I note that the Hindenburg Omens are still in effect and that the McClellan Oscillator is now very negative with a -165.29 reading on the close this past Friday. If, however, we turn to Elliott Wave, this current decline would appear to be a wave 4 movement of the larger wave B, and that would mean that a 5th wave higher is in the wings. As McHugh says, that 5th wave may possibly be a Christmas rally. I am not personally sure, nor confident in the count, and thus I am simply watching support and resistance levels watching the battle between deflationary forces and ridiculous self-destructive POMO.

That potential double-top looks ominous to me, especially if the markets fail to mount a rally here. Unfortunately, we won’t know what the count is unless we descend all the way beneath SPX 1128. That’s because a wave 4 can’t invade the space of wave 1 and that’s where wave 1 topped. So, if our current descent turns higher before then, then it’s likely a wave 4 and 5 is coming. If 1128 falls, then all bullish bets are off and something else is happening, but that’s quite a ways down from here, and downward movement has to battle never ending Fed intervention. It’s all lunacy to me, everyone’s been blinded by the light and the market’s no place for long term “investments,” that’s for sure.